Audit of Cost of goods soldPart II: Company reportOverview- General Background

Preliminary analytical review

Risk Assessment

RecommendationIndustry TrendsBusiness StrategyBackGroundThe retailer industry in the United States is one of the most industries in the residents’ daily lives. There are thousands of retailer stores in the US mainland, like Kroger, Wal-Green, CVS, and the largest retailer, Wal-Mart. The retailers make more than 8 billion dollars revenue every year, and they also provide more than 3.1 million job occupations to the citizens. Wal-Mart is the head of the retailer industry. It has the most market share, makes the largest amount of revenue, and provides the biggest number of employees.Advertising Strategies

2.Inspect the inventory to determine its existence and evaluate its condition to make sure inventories are properly stated at cost.Audit of Cost of goods soldBusiness StrategyCorporate Strategy:

Strong distribution, inventory management system

Differentiated pricing

Cost advantage strategy

IT advantageMajor CompetitorsFrom Finance YahooHorizontal analysisVertical AnalysisRatio AnalysisRisk from acquired stores in emerging marketIn Wal-Mart’s 5,651 stores operated in 26 countries, nearly 60% of them are by emerging.Number of emerging stores: Mexico (1,600 stores), China (364 Stores), Brazil (429 Stores), Costa Rica (200 Stores), Chile (314 Stores), Guatemala (198 Stores) and South Africa (219 Stores)3High riskRisk from emerging and acquired stores6 billion fraud of a Chinese local retail chain—SEASTAR Supermarket, which used to be Wal-Mart’s negotiating acquisition targetfraudFormal CEOhttp://news.cb.com.cn/html/20/n-5020-2.htmlAcquired stores number reaches 10% of Wal-Mart’s total stores.In the latest 10-K, goodwill composed 10.7% of its total asset.In overseas, Wal-Mart usually not have a dominating position and face intense competitions from local players and other international players.Risk from acquired stores--goodwillGoodwill Impairment Test becomes essential and crucial for the auditorRisk from Sales and Account ReceivableFrom latest 10K, Wal-Mart’s average account receivable is only 1.2% of fiscal year sales.The A/R auditing risk is lower than other industry auditing targets.Potential risks may come from sales return and allowances, rebates, discounts, loyalty points, gift cardsWal-Mart China inflated 700 million gift card sales fraud in 2011Wal-Mart China has not turned to profit since it comes into China market in 1996.Based on Chinese news report, Wal-Mart China changed CFO and COO in 2011 mainly due to the inflated gift card sales in China.Wal-Mart China recognized all the gift card sales including those have not be consumed by customer. They first listed some low or even zero gross profit margin merchandises to dealer and then encouraged them to buy via gift card with additional discount. They got significant sales of gift card through this method. Both the sales of gift card and the total sales number were increased.http://news.cb.com.cn/html/35/n-520835.htmlRisk from COGS and expensesRetailing companies are usually judged by operating margin for their operating efficiency by investors.the incentive to manipulate or deflate expenses and cost.Wal-Mart currently faces bribery charges in Mexico which the bribery was accounted as company expenses.http://online.wsj.com/article/SB10001424052702303978104577360283629622556.htmlRisk from legal chargesViolation of Foreign Corrupt Practices Act (FCPA) in Mexcico.Gender and sexual orientation.Many disputes with labor unions.California State Teachers’ Retirement System filed charge against Wal-Marthttp://www.reuters.com/article/2012/05/22/us-walmart-calstrs-idUSBRE84L0VO20120522, http://www.nytimes.com/2012/06/05/business/wal-mart-vote-reflects-rise-in-shareholder-unhappiness.htmlRecommendationWe believe the current economic condition is relatively in favor of retail industry and Wal-Mart is in good financial and business condition.As the biggest company by annual sales globally, Wal-Mart’s complicated situation need auditor’s specific attention and in-depth review.ENDA 100 stores Chinese local retail chain SEASTAR Supermarket, which was a negotiating acquisition target for Wal-Mart but finally sold to an Australian retail chain, found inventory fraud in 2009 after the acquisition deal close.

The auditors from Deloitte China which executed the acquisition due diligence.

The managements of the company moved inventories from other stores to the sampled stores and faked the logistic documents to pass the due diligence.

The fraud was detected when a POS machine did not work, the technician found original data of sales had been changed.